Borrowing power refers to the amount you?re likely to be loaned based on your income, liabilities and day to day outgoings.
Show me the money!
Income which lenders could use to determine your borrowing capacity includes salary, overtime and allowances, perhaps you receive an end of year bonus (lucky for some!), and some of the government benefits received by families.
Each lender has different policies and ways of assessing income. This is where a broker is handy in assessing how each lender will assess the income and if you can use this income at all in your application.
Self Employed?? Don?t sweat
If you work for yourself, lenders look at your business income, what you pay yourself as a salary and may even be able to add back some expenses you?ve had throughout the year which would help to increase your borrowing power. If you haven?t been self employed for that long, there are lenders who may still be willing to lend you money. Lenders may need some BAS statements or an Accountant?s declaration, best to expand on this with a broker.
Lenders will also look at your credit card limits, this includes any interest free deals you may have used to buy furniture or electrical goods. If you have car loans or personal loans, lenders want to know the repayments are and may even request the latest statement.
A huge focus area for most lenders nowadays is Living Expenses…they look at your essential spends like fruits and veg, costs to run and maintain your car, insurances etc. Lenders also look at how much you spend on entertainment, eating out and yes even UberEATS! If you?re in the process of saving for your first or next home, it may be worthwhile doing your own analysis (before the banks do it) via a free budget template such as ASIC?s Budget Planner.
Why speak to a broker?
Borrowing power calculators on the web give you an indicative figure of what you?re likely to be loaned, perhaps a good way to start the research process.
However, given each lender has different policies on employment, how your income is assessed and a whole spectrum of other financial items, best to speak to a broker to receive a more accurate figure. Plus, brokers have access to several lender calculators which will save you some valuable ?me? time.
Just because a lender says they are prepared to lend you $500,000, have a good think about whether you want to stretch yourself to the nth degree. You want to ensure that you are comfortable with the repayments and can maintain a decent standard of living. Remember there will be other costs such as council rates, water rates, repairs and maintenance with your new home!
This is general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.